IN THE HIGH COURT OF SOUTH AFRICA,

FREE STATE DIVISION, BLOEMFONTEIN

Reportable: YES Of Interest to other Judges: YES Circulate to Magistrates: NO

Case number: 2858/2012 In the matter between: OOSTHUIZEN, MARISA VOGEL Plaintiff and CASTRO, JOSE FRANSISCO Defendant And CENTRIQ INSURANCE COMPANY LTD Third Party HEARD ON: 9 & 10 MAY 2017 JUDGMENT BY: DAFFUE, J DELIVERED ON: 18 SEPTEMBER 2017

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I INTRODUCTION: [1] The following warning of Schutz JA in Durr v Absa Bank Ltd &

Another 1997 (3) SA 448 (SCA) at 453 D applies in casu as well.

The learned Judge of Appeal said: “Hindsight is not vouchsafed the

common man as he picks his course through life. This must be kept

constantly in mind in a case like this one, where all is so obvious now.

[2] In casu, the court is confronted with mainly two issues, the one

relatively evident although the warning supra will be heeded, but

the other is far more vexed and contentious. The case is about

the loss sustained by a widow who invested a large sum of

money on the advice of a financial services provider (“FSP”) and

an insurance company’s obligation to indemnify the FSP. I shall

interchangeably refer to FSP and broker, the reason being that

the term broker, or insurance broker, is used by authors on

insurance law and in many judgments. The terms “financial services

provider” or “intermediary services” were seldom if ever used prior to

the promulgation of the Financial Advisory and Intermediary

Services Act, 37/2002 (“the FAIS Act”).

[3] A Sharemax investment that turned out to be lamentably bad

triggered the litigation.

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II THE PARTIES:

[4] Plaintiff is Marisa Vogel Oosthuizen, a female presently residing

in Langebaan, Western Cape, formerly from the Vrede district in

the Free State Province. She has been represented in the

proceedings before me by Adv JF Mullins SC, duly instructed by

Honey Attorneys, Bloemfontein.

[5] Defendant is Jose Fransisco Castro, a FSP duly licensed to act as

such in accordance with the FAIS Act with business and

residential address in Vrede, Free State Province. Adv PJJ

Zietsman appeared for defendant, duly instructed by Blair

Attorneys, Bloemfontein.

[6] The third party is Centriq Insurance Company Ltd (“the insurer”),

who provided professional indemnity insurance to defendant as a

member of the Financial Intermediaries Association of South

Africa. Advv CE Watt-Pringle SC and C Bester appeared for the

insurer, duly instructed by Andre Muller & Associates, c/o

McIntyre & Van der Post, Bloemfontein.

III THE PLEADINGS: [7] I shall briefly set out the allegations contained in the pleadings,

but wish to emphasise that it soon became apparent during the

hearing that only two aspects remained in contention as set out in

paragraph 2 supra.

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The particulars of claim:

[8] It is plaintiff’s case that she and defendant entered into a written

agreement in terms of which defendant advised her generally in

respect of investment, and in particular to invest R2 million in the

form of an investment offered by Sharemax Investments (Pty) Ltd

(“Sharemax”) in respect of a scheme described as THE VILLA

RETAIL PARK HOLDINGS 2 held in a company, THE VILLA

RETAIL PARK HOLDINGS 2 LTD (“The Villa”).

[9] As a result of the failure of the Sharemax investment and no

prospects of making any recovery, plaintiff claimed damages in

the form of loss of capital of R2 million together with mora interest

on the capital amount from date of investment, less an amount of

R1 400.00 received, alternatively R2 838 600.00 being the capital

of the investment and a yield based on 7% per annum over a

period of six years, together with mora interest from 27 July 2016

to date of payment and costs as between attorney and client.

[10] Plaintiff’s claim is based on defendant’s alleged breach of his

contractual duties in several instances, some of which are the

following:

1. Defendant failed to act honestly and fairly in the interest of

plaintiff in recommending the Sharemax investment;

2. Defendant misrepresented to plaintiff that media criticism of

investments in Sharemax was motivated by envy insofar as

the criticism was intentional, negligent and not honest and

fair;

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3. The Sharemax investment was not in keeping with plaintiff’s

risk profile which required minimal risk whereas the

investment in Sharemax was an investment of very high risk;

4. Defendant failed to furnish objective financial advice to

plaintiff appropriate to her needs and interest;

5. Defendant knew that plaintiff required a safe investment, but

advised her to make the Sharemax investment when he

ought to know by taking reasonable care that the Sharemax

investment was a very high risk investment;

6. Defendant failed to exercise the degree of skill, care and

diligence to be expected of an authorised financial services

advisor furnishing investment advice.

Defendant’s plea:

[11] Defendant admitted the agreement relied upon by plaintiff and

that he had given financial advice of a general nature, but

pleaded that plaintiff elected to make the investment in Sharemax

notwithstanding the fact that he had drawn her attention to a

recent negative article pertaining to Sharemax in the Rapport

newspaper. Any alleged breach of contract was denied.

The third party notice: [12] Although defendant’s plea was filed on 8 October 2012, it filed a

notice in terms of Rule 13 of the Uniform Rules of Court some two

and a half years later, i.e. on 30 February 2015 only. A formal

application for condonation and joinder of the insurer was

required. An appropriate order was made on 5 March 2015, but

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the costs were reserved for later adjudication. Defendant claimed

indemnity from the insurer and in so doing relied on the written

insurance contract entered into between him and the insurer.

The third party’s defence:

[13] The insurer admitted the contract between it and defendant and

that it undertook to indemnify defendant against losses arising out

of inter alia any legal liability arising from claims made against the

defendant and reported to the insurer during the period of

insurance in connection with the business of defendant by reason

of any negligent act, error, or omission committed in the conduct

of the business by the defendant. However, it denied liability to

indemnify defendant, averring that defendant’s claim fell within

the parameters of the exclusion clause contained in the insurance

contract with specific reference to clause 3(ii).

[14] Clause 3(ii) of the insurance contract relied upon by the insurer

reads as follows:

“The Insurers shall not indemnify the Insured in respect of any loss arising

out of any claim made against them

1…….

2…….

3 (i)……

(ii) in respect of any third party claim arising from or contributed to by

depreciation (or failure to appreciate) in value of any investments, including

securities, commodities, currencies, options and futures transactions, or as a

result of any actual of alleged representation, guarantee or warranty

provided by or on behalf of the Insured as to the performance of any such

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investments. It is agreed however that this Exclusion shall not apply to any

loss due solely to negligence on the part of the Insured or Employee of the

Insured in failing to effect a specific investment transaction in accordance

with the specific prior instructions of a client of the Insured.” (emphasis

added)

IV AGREEMENTS AND INTRODUCTORY SUBMISSIONS: [15] Mr Mullins presented me with written introductory submissions in

terms of Rule 39(5) in support of his opening argument. I do not

intend to deal with those submissions at this stage, but will do so

when the evidence and arguments are evaluated infra.

[16] I was provided with five bundles marked exhibits “A” to “E”, being

the trial bundle, a photo bundle, a bundle containing extracts of

newspapers articles, an insurance bundle and an experts’ bundle

respectively. The usual status applied to the documents

contained in the bundles, i.e. that they are what they purport to be

without admitting the contents thereof to be true and correct.

[17] Mr Mullins mentioned that the defendant could not concede

liability in respect of plaintiff’s claim as a result of condition 5 of

the insurance contract entered into between him and the insurer

which provides that the insured shall not make any admission in

respect of any claim against him without the written consent of the

insurer. However, defendant would not contest plaintiff’s

evidence. Therefore the third party was invited to waive such

condition so that the trial could continue in order for the court to

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adjudicate whether the insurer is liable to indemnify defendant

and nothing else. This invitation was declined.

[18] Mr Mullins made it clear that in the event of the insurer not be

prepared to waive condition 5, plaintiff will ultimately ask punitive

costs against the insurer. Mr Zietsman confirmed that defendant

could not, and therefore did not, concede liability, but that

defendant would not contest his liability any further. Mr Watt-

Pringle stated that the third party only heard that morning that

defendant would not put up a defence against plaintiff’s claim, but

that the insurer was not prepared to waive condition 5.

[19] The parties handed me a written agreement in respect to the

quantum of plaintiff’s damages which agreement I made an order

of court by consent. The full agreement reads as follows:

“The parties (Plaintiff; Defendant; Third party) agree as follows on the

Plaintiff’s damages as against the Defendant:

1. They agree that the capital investment is lost, i.e. that there are no

prospects of recovery thereof;

2. They agree further that the Plaintiff has suffered damage (if breach of

contract or of duty of care is proven, which is still in dispute) as follows:

2.1 The capital of R2 000 000,00;

2.2 With reference to paragraphs 26 and 27 of the Rule 36(9)(b)

summary of Mr Heystek (pp 34 - 35 of the Experts Bundle), the

return which the Plaintiff would have made had she invested the

capital in a relatively safe investment for the mean period of 6

years, at the mean rate of the returns mentioned by Mr Heystek

(6% - 8%), i.e. 7% less the R1 400,00 received on 3 August

2010.

3. Questions of mora interest are for the court to determine.”

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V COMMON CAUSE FACTS: [20] I shall deal with some of the documents referred to under this

heading again when I evaluate the evidence infra, but for

purposes of providing the reader with a background, I deem it

necessary to refer to documentary evidence which is not in

dispute. Plaintiff’s evidence is largely uncontested insofar as she

was not cross-examined at all by defendant’s counsel and Mr

Watt-Pringle on behalf of the insurer merely tried to obtain

concessions from her in support of the insurer’s defence against

defendant, i.e. to hopefully show that the defendant’s conduct fell

within the purview of the exclusion clause. The following is

therefore common cause:

1. Plaintiff obtained a diploma in higher education where after

she taught for approximately twelve years.

2. In 2001 she married a farmer, Mr Oosthuizen and one child,

Benjamin, was born out of the marriage.

3. On 13 March 2010 Mr Oosthuizen (‘the deceased”) was

killed in a shooting incident, leaving the plaintiff a widow with

the two and a half year old Benjamin.

4. A policy on the life of the deceased paid out to plaintiff, the

proceeds being the amount of R3.4 m of which she set aside

R2 m to invest for the future, kept R300 000,00 as a reserve

fund and used the balance to purchase calves.

5. She was in a bad emotional state, being confronted with lack

of money immediately after the death of her husband and

prior to the pay-out of the policy. The executor of the

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deceased’s estate even cancelled payment of the medical

aid premiums and she had to borrow money from her brother

to take care of herself and her son. On 27 July 2010, i.e.

four and a half months after she was widowed, she had a

meeting with defendant who advised her how to invest the

amount of R2 m.

6. Plaintiff did not have any experience at all regarding financial

products and relied on defendant whom she trusted as he

was the deceased’s broker prior to his death.

7. During the consultation and after accepting the advice given

by defendant, he filled out various forms which were signed

by plaintiff and counter-signed by defendant. These are not

in contention and were also attached to the particulars of

claim as Annexures ”A” – “E”. The following appears from

the one document under the heading “Behoefte Ontleding”

(in English: Needs Analysis).

“1.5.1 Indien wel, hoeveel inkomste benodig u?: Maksimum met lae

risiko. (Maximum with low risk.) (The answer is in defendant’s

handwriting.)

“8. Enige addisionele oorwegings wat in ag geneem moet word ten

opsigte van u beleggings? Om ‘n veilige hoë inkomste belegging aan

te gaan. (To make a safe high income investment). (The answer is

again in the handwriting of defendant.)

8. The “Advies en Tussengangersooreenkoms” (Advice and

Intermediary Agreement) stipulates as follows and I merely

quote the provisions specifically relied upon by counsel:

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“4.2 Waarborge (indien van toepassing):

4.2.1 Die kliënt verstaan dat die beleggings kapitaal nie gewaarborg is

nie. Die adviseur sal egter die beste van sy vermoë doen om ‘n

veilige belegging namens die kliënt te maak. (The advisor shall

do his best to make a safe investment on behalf of the client.)

4.4.3 Hierdie portefeulje se oogmerk is om hoër

beleggingsopbrengste te behaal oor die langtermyn, wat hoër

beleggingsrisiko teweegbring (potensiële verliese oor die kort

termyn) en dus nie met meer stabiele portefeuljes vergelyk kan

word nie;

4.4.4 Die kliënt verstaan dat, om die beleggingsopbrengs te behaal is

dit nie moontlik om die beleggerskapitaal of teikenopbrengs te

waarborg nie.”

9. Plaintiff testified that she made it clear to defendant that she

could not risk losing even two cents as the money was

earmarked for her son’s upbringing.

10. She was referred to an article that appeared in the Rapport

newspaper that was severely critical of investments in

Sharemax Products, but was comforted by defendant that

several people were merely jealous and that the criticism did

not hold any water. She was informed that the investment

was “in property” and that “property cannot disappear”.

11. Defendant did not explain any other investment products to

plaintiff and emphasized that the recommended investment

was so good that he did not even want to introduce other

financial instruments and/or investments to her.

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[21] Several prominent writers on financial matters, including the award

winning journalist, the late Mr Deon Basson, criticised the

Sharemax investment strategy over many years. As early as 26

May 2004 Basson wrote for the Beeld, an Afrikaans daily

newspaper, based on queries received from investors who

invested in Sharemax schemes and had lost their capital. He

warned against property syndication schemes such as Sharemax

and PIC and any person reading financial magazines and the

business sections of newspapers will know what eventually

happened to these schemes. Another negative article was written

in Moneyweb of 22 November 2007. Noseweek published an

article in January 2008, mainly relying on the late Mr Basson’s

investigations wherein he referred to the apparent lack of

transparency in respect of Sharemax property syndications. Mr

Vic de Klerk, an eminent author on investment products, wrote an

article in Finweek of 8 July 2010, a weekly publication which

every FSP should read, under the heading “House of cards

collapsing”. He specifically targeted investments in The Villa and

wrote, based on prospectuses received, that Sharemax as

promotor had received R1.44bn from the public over two years

and that another R2.25bn was needed to complete the shopping

mall, hopefully by the end of September 2011. He also referred to

the instructions of the Registrar of Banks to Sharemax to

discontinue its method of financing which was in violation of the

Banks Act as deposits were taken from investors. The cut-off

date was 15 July 2010. De Klerk had the following advice for

FSP’s: “To the marketers of the shares on behalf of Sharemax – of course,

you’re all registered with the Financial Services Board (FSB) – also just a

small warning. The Reserve Bank and the registrar aren’t too happy with the

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product you’re offering. Everyone knows that now,… For your own future

careers it may just be a good thing to mention that to your clients, even if it

reduces your chances of earning that attractive 6% commission.” Mr

Jacques Pauw also wrote a similar article for the City Press of 25

July 2010 and he and Ms Anna-Maria Lombard’s article to the

same effect appeared in the Rapport of 24 July 2010, the article

which defendant was well aware of, stating that tens of thousands

of investors might have lost their investments in Sharemax. In his

evidence the financial expert, Mr Magnus Heystek confirmed the

figures received and still needed to complete the shopping

complex. This was never contested.

[22] It is significant to mention some of defendant’s responses to

plaintiff’s request for further particulars for purposes of trial,

especially bearing in mind the fact that he decided neither to

testify, nor to cross-examine plaintiff:

1. In response to a question whether or not defendant offered

any comment or observation regarding the newspaper article

in the Rapport he replied as follows: “2.1 Ja. Verweerder het gesê dat die eiseres nie daaroor hoef te

bekommer nie, aangesien hy reeds met Sharemax in verbinding getree

het, asook dit met sy konsultant bespreek het en dat hulle aan hom

bevestig het dat dit net nog ‘n aanslag soos vele vantevore was en dat

geen van die inligting waar en korrek is nie.”

2. At the end of paragraph 3 of the reply defendant responded

as follows:

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“Deur al die ondervinding en die vertroue sedert 2003 in berekening te

bring, tesame met die maatskappy se rekord, was daar min, indien

enige, opsies wat kon kers vashou by Sharemax.”

3. Plaintiff requested further answers from defendant in her rule

33(4) questionnaire served on 14 June 2013, about three

years after the investment was made. Even at that stage,

and notwithstanding the benefit of hindsight, defendant

reiterated that an investment in Sharemax was a low risk

investment, bearing in mind the history of Sharemax, and

also that it was a safe investment.

[23] It is common cause that plaintiff invested an amount of R2 m as

advised by defendant and that, save for an amount of R1 400.00

that she received in August 2010, she received no further interest

and/or dividends and that the total amount of the capital has been

lost.

[24] Defendant was appointed as representative of the Unlisted

Securities South Africa FSP Network (Pty) Ltd (t/a USSA) in order

to render financial services regarding unlisted securities such as

the financial instruments provided by Sharemax. Defendant is

also licensed as a FSP with the Financial Services Board in terms

of s 8 of the FAIS Act with effect from 10 June 2008.

[25] Defendant entered into a professional indemnity insurance contract

with the insurer, one of the insured events being professional

indemnity to the limit of liability of R2.5m per claim, subject to

payment of an excess in the amount of R10 000.00. It is this

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contract that contains the exclusion clause referred to supra and

which clause is the real bone of contention in the matter.

[26] Mr Magnus Heystek, an eminent business and investment

journalist and investment strategist, gave expert evidence in

respect of several aspects; in particular whether the conduct of

defendant complied with that which could be expected of a

financial advisor (or FSP as I throughout this judgment refer to

these persons) in the circumstances, and if not, what type of

investment a reasonable financial advisor ought to have suggested

in the circumstances. His expert summary provided in terms of

Rule 36(9)(b) was presented, largely as his evidence in chief as

agreed to by counsel, whereupon he was cross-examined by Mr

Watt-Pringle with the apparent intention to show that so-called safe

investments are not necessary safe, with reference to inter alia

banking institutions that have been liquidated, causing investors to

lose money. I do not intend to say anything more about Mr

Heystek evidence at this stage, but shall deal with it more fully

during my evaluation of the evidence.

VI LEGAL PRINCIPLES AND AUTHORITIES: [27] I intend to firstly mention the legal principles and authorities

pertaining to the liability of a financial advisor or broker,

throughout herein referred to interchangeably as a broker or a

FSP. The locus classicus is Durr supra. The Durr-judgment

preceded the FAIS Act by several years, but notwithstanding that,

the principles set out in Durr are still relevant and to a great extent

accepted by the legislature if the wording of the FAIS Act is

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considered. In Durr Schutz JA said the following on p 455 I-J: “Just about everything that Stuart told the Durrs about Supreme was wrong,

not that he knew it, but because he had allowed himself to be misled, as

many others also had been, by a series of deceits.” The broker assured

the plaintiff, Ms Durr, that the investment was entirely safe.

[28] Schutz JA dealt with the duties of a financial advisor or broker such

as the defendant in casu in no uncertain terms at pp 460 F - 462

D and I quote selectively:

“What did the law expect of Stuart and ABSA?

Imperitia culpae adnumeratur, says D 50.17.132 - lack of skill is regarded as

culpable. That much is accepted by the respondents. But how much skill, they

say. We have shown all the skill that an 'ordinary' or 'average' broker, or a

bank employing such a one, need show. What more can be asked of us?

Two questions arise in this case. (1) In general, what is the level of skill and

knowledge required? (2) Is the standard required in judging that level that of

the ordinary or average broker at large, or is it that of the regional manager of

the broking division of a bank professing investment skills and offering expert

investment advice?

The answer to the first question is found in the judgment of Innes CJ in Van

Wyk v Lewis 1924 AD 438 at 444 with reference, as it happens, to medical

practitioners:

'It was pointed out by this Court, in Mitchell v Dixon (1914 AD at 525), that "a

medical practitioner is not expected to bring to bear upon the case entrusted

to him the highest possible degree of professional skill, but he is bound to

employ reasonable skill and care". And in deciding what is reasonable the

Court will have regard to the general level of skill and diligence possessed

and exercised at the time by the members of the branch of the profession to

which the practitioner belongs. The evidence of qualified surgeons or

physicians is of the greatest assistance in estimating that level.'

(Own emphasis.)

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'But the decision of what is reasonable under the circumstances is for the

Court; it will pay high regard to the views of the profession, but it is not

bound to adopt them.'

(At 448.)

However, the second question is less easy - whether the standard is set by

the broking community at large or by a much smaller group of which Stuart is

a representative. The Court below opted for the wider and therefore less

strict test, … (which the SCA criticised and eventually rejected) In his evidence Stuart affirmed that he was content that his conduct be

measured against the standard of an expert financial and investment

advisor.

(When examining the testimony of the expert witness called by

Stuart and Absa, Schutz JA continued as follows:)

He (the average broker) would not ask for financial statements, and if

provided with them would not be able to read them; he would not know that a

prospectus is required for a public offer, or how a prospectus differs from

glossy marketing material; he would take a 'secured debenture' certificate at

face value; he would be misled by misleading brochures and advertisements

such as were issued by Supreme; and, critically for this case, he would not

have the skills to analyse or assess 'institutional risk'. This expression is

used to denote the soundness or creditworthiness of a prospective debtor. It

is used by Wessels in contrast to 'product risk'. A 'product' is part of a

broker's stock in trade, like an endowment policy or a fixed deposit. That falls

within the 'typical broker's' sphere of competence. But institutional risk is

quite beyond him. This means, in plain English, that if he is advising a client

to lend money to a new debtor, he lacks the skill to assess the debtor's

creditworthiness. That provokes the immediate question whether he should

recommend the debtor, without warning his client of his own incapacity.” At

p 464 A Schutz JA proceeded as follows: “I conclude that the

appropriate standard is that of the regional manager of the broking division

of a bank professing investment skills and offering investment advice.”

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[29] At p 469 E Schutz JA referred to the “warning signs, if not flashing

lights.” Finally, at p 469 H-I the learned judge commented as

follows in respect of the broker in that matter:

“Either he had to forewarn the Durrs where his skills ended, so as to enable

them to appreciate the dangers of accepting his advice without more ado, or

he should not have recommended Supreme. What he was not entitled to do

was to venture into a field in which he professed skills which he did not have

and to give them assurances about the soundness of the investments which

he was not properly qualified to give.” (emphasis added)

[30] Jackson & Powell On Professional Liability 8th ed at para 15-022

mention the following pertaining to the reasonable care and skill

to be exercised by a broker: “In common with other providers of relevant

services acting in the course of business, a provider of financial services will

be under an implied if not express contractual duty to exercise reasonable

care and skill in carrying out the services required of him. The standard of

care and skill will be, at least in most respects, that to be expected of a like

provider engaged to provide the relevant services.”

[31] Simpson (Gen Ed) Professional Negligence and Liability (Informa,

2016) state the following at para 12.55:

“The contract between the advisor and the client will include an implied term

if not an express one, that the advisor will carry out his mandate and the

tasks associated with it with reasonable skill, care and diligence. He must

exercise that degree of skill, care and diligence that would be exercised in

the ordinary and proper course of a similar business and employ the skill

usual and necessary in the business for which he receives payment.”

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[32] As mentioned, since Durr the FIAS Act has been promulgated,

the date of commencement being 15 November 2002. I quote the

following relevant parts of s 16 of the FAIS Act:

“Principles of code of conduct

1. A code of conduct must be drafted in such a manner as to ensure that

the clients being rendered financial services will be able to make

informed decisions, that their reasonable financial needs regarding

financial products will be appropriately and suitable satisfied and that for

those purposes authorised financial services providers, and their

representatives, are obliged by the provisions of such code to

(a) act honestly and fairly, and with due skill, care and diligence, in the

interests of clients and the integrity of the financial services industry;

(b) ……..

(c) seek from clients appropriate and available information regarding

their financial situations, financial product experience and objectives

in connection with the financial service required;

(d) act with circumspection and treat clients fairly in a situation of

conflicting interests;

(e) comply with all applicable statutory or common law requirements

applicable to the conduct of business.

2. A code of conduct must in particular contain provisions relating to –

a. the making of adequate disclosures of relevant material information,

including disclosures of actual or potential own interests, in relation to

dealings with clients;

b. …

c. avoidance of fraudulent and misleading advertising, canvassing and

marketing;

d. ….

e. …

eA. …

f. …..” (emphasis added)

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[33] A code of conduct has been promulgated as well as several

amendments thereto to give effect to the provisions of s 16 of the

FIAS Act. I do not think it is necessary to deal with any of the

provisions contained in the Code. I believe it is necessary to

record that registration in terms of FAIS is now required for

persons venturing into the business of insurance brokers and

financial advisors. Much more professionalism is now required by

the legislature, all in the interest of the public, than was the case

when Durr was decided.

[34] “Advice” is defined in s 1 of the FIAS Act to mean “subject to

subsection 3(a), any recommendation, guidance or proposal of a financial

nature furnished, by any means or medium, to any client or group of clients –

a. in respect of the purchase of any financial product; or

b. in respect of the investment in any financial product; or

c. …

d. …

and irrespective of whether or not such advice

i. is furnished in the course of or incidental to financial planning in

connection with the affairs of the client, or

ii. results in any such purchase, investment, transaction, variation,

replacement or termination, as the case may be, being effected;”

Section 1(3)(a) of the FIAS Act stipulates what is not included

under the definition of “advice”, but this does not take the matter

any further for purposes hereof.

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[35] After having set out the relevant applicable principles in respect of

the duties and responsibilities of FSP’s, it is necessary to have

regard to the rules of construction of contracts in general and

insurance contracts in particular. Several recent judgments of

the Supreme Court of Appeal should be referred to. In an oft-

quoted judgment Wallis JA summarised the current state of our

law regarding the interpretation of documents, including contracts,

as follows in Natal Joint Municipal and Pension Fund v Endumeni

Municipality 2012 (4) SA 593 (SCA) at para [18]:

“Interpretation is the process of attributing meaning to the words used in a

document, be it legislation, some other statutory instrument, or contract,

having regard to the context provided by reading the particular provision or

provisions in the light of the document as a whole and the circumstances

attendant upon its coming into existence. Whatever the nature of the

document, consideration must be given to the language used in the light of

the ordinary rules of grammar and syntax; the context in which the provision

appears; the apparent purpose to which it is directed; and the material

known to those responsible for its production. Where more than one

meaning is possible, each possibility must be weighed in the light of all these

factors. The process is objective, not subjective. A sensible meaning is to be

preferred to one that leads to insensible or unbusinesslike results or

undermines the apparent purpose of the document.” Thus, the matter

must be approached holistically and context and language must

be considered together with neither predominating over the other.

See also Bothma-Batho Transport (Edms) Bpk v S Bothma en

Seun Transport (Edms) Bpk 2014 (2) SA 494 (SCA) at paras [10]-

[12].

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[36] In BP Southern Africa (Pty) Ltd v Mahmood Investments (Pty) Ltd

[2010] 2 All SA 295 (SCA) Lewis JA stated the following in a

unanimous judgment at para [11]:

“It is settled law that the contractual provision must be interpreted in its

context, having regard to the relevant circumstances known to the parties at

the time of entering into the contract …. It is also clear that the position must

be given a commercially sensible meaning …”

In Novartis v Maphil [2015] ZASCA 111, 3 September 2015, the

same learned judge of appeal stated the following at para [28]:

“[28] The passage cited from the judgment of Wallis JA in Endumeni

summarizes the state of the law as it was in 2012. This court did not change

the law, and it certainly did not introduce an objective approach in the sense

argued by Novartis, which was to have regard only to the words on the

paper. That much was made clear in a subsequent judgment of Wallis JA in

Bothma-Botha Transport (Edms) Bpk v S Bothma & Seun Transport (Edms)

Bpk [2013] ZASCA 176; 2014 (2) SA 494 (SCA), paras 10 to 12 and in North

East Finance (Pty) Ltd v Standard Bank of South Africa Ltd [2013] ZASCA

76; 2013 (5) SA 1 (SCA) paras 24 and 25. A court must examine all the facts

- the context - in order to determine what the parties intended. And it must do

that whether or not the words of the contract are ambiguous or lack clarity.

Words without context mean nothing.” (emphasis added)

[37] E R Hardy Ivamy, General Principles of Insurance Law, 6th ed

identified and discussed thirteen rules of construction of

insurance contracts. I do not intend to deal with all the rules

mentioned and discussed as many are recognisable in the South

African law reports and the judgments quoted in this judgment,

but merely wish to deal with the rule that the written words in an

23

insurance contract should be given more effect than the printed

words. The author relies on several English judgments and

continued as follows at p 361-2:

“But when there is a conflict between the printed and the written clauses,

greater consideration will be paid to the written clauses. The written words

are the immediate language and terms selected by the parties themselves

for the expression of their meaning; the printed words, on the other hand, are

a general formula adapted equally to their case and that of all other

contracting parties upon similar occasions and subjects. …. The printed

words are not necessarily intended to stand as part of the contract in any

particular case since, through carelessness or in the hurry of business, the

parties may have omitted to delete the superfluous or inapplicable words

from the form or to alter the printed words so as to make them conform

exactly to the contract which they intended to make.

At the same time, the print must be construed with the writing as far as

possible; it is not to be rejected if not repugnant to or inconsistent with what

is written. If, however, the writing shows it to be inapplicable, the print must

be disregarded” (emphasis added)

[38] Birds et al Macgillivray on Insurance Law 13th ed, 2015, deal with

construction of contracts in chapter 11 and inter alia make the

point that “the literal meaning of words must not be permitted to prevail

where it would produce an unrealistic and generally unanticipated result as,

for example, where it would unwarrantably reduce the cover which it was the

purpose of the policy to afford…” and furthermore, the construction of

an insurance policy should avoid unreasonable results.

[39] I have touched upon the construction of insurance contracts as

mentioned in the English authorities and the latest judgments of

the South African Supreme Court of Appeal pertaining to

24

interpretation of contracts in general. The locus classicus on

construing insurance contracts in South Africa still remains the

unanimous judgment authored by Smalberger JA in Fedgen

Insurance Limited v Leyds 1995 (3) SA 33 (AD) where the

learned judge of appeal remarked as follows at p 38A-E:

“The ordinary rules relating to the interpretation of contracts must be applied

in construing a policy of insurance. A court must therefore endeavour to

ascertain the intention of the parties. Such intention is, in the first instance, to

be gathered from the language used which, if clear, must be given effect to.

This involves giving the words used their plain, ordinary and popular

meaning unless the context indicates otherwise…. Any provision which

purports to place a limitation upon a clearly expressed obligation to

indemnify must be restrictively interpreted …., for it is the insurer's duty to

make clear what particular risks it wishes to exclude….. A policy normally

evidences the contract and an insured's obligation, and the extent to which

an insurer's liability is limited, must be plainly spelt out. In the event of a real

ambiguity the contra proferentem rule, which requires a written document to

be construed against the person who drew it up, would operate against

the insurer as drafter of the policy….” (authorities relied upon excluded

from quotation)

[40] There is uncertainty and a serious difference of opinion between

counsel for plaintiff and defendant on the one hand and counsel

for the insurer on the other hand about the real meaning to be

attributed to the exclusion clause in casu. Therefore, relevant

authorities must be considered, although counsel were ad idem

that there are no reported judgments on all fours with the facts in

casu.

25

[41] Exclusion clauses are not unusual in insurance contracts. Some

authorities in this regard shall be referred to. Enright and Jess

Professional Indemnity Insurance Law, 2nd ed, 2007, stipulate at p

524 that a “form of exclusion clause might exclude claims arising from the

giving of any express or implied warranty or guarantee relating to the financial

return of any investment or portfolio of investments.” Such an exclusion

clause may make proper commercial sense, be consistent with

and not repugnant to the purpose of insurance contracts. This will

be addressed during the course of this judgment.

[42] Simpson Professional Negligence and Liability supra states the

following at para 5.171:

“An excess clause or deductible is a clause whereby the insured is to bear

the first part of any loss, expressed as an amount of money or as a

percentage of loss … As such clauses are seen as an exclusion of liability

drafted by the insurer, they will be construed strictly against the insurer

.”

[43] Hardy Ivamy supra, again with reference to several English

authorities, expressed himself as follows at p 286:

“Since exceptions are inserted in the policy mainly for the purpose of

exempting the insurers from liability for a loss which, but for the exception,

would be covered by the policy, they are construed against the insurers with

the utmost strictness. It is the duty of the insurers to accept their liability in

clear and unambiguous terms. (emphasis added)

26

[44] Colinvaux’s Law of Insurance, 6th ed, (Editor R Merkin) makes the

following submission based on English authority at pp 324-325:

“As the main purpose of a liability policy is to permit the assured to recover

for negligence, the policy presumes that there will have been some

misconduct on the assured’s part. Consequently, in the absence of any

express provision restricting the insurer’s liability, the assured will be able to

recover unless his liability is attributable to an intentional criminal act on his

part. The mere fact of criminality is not sufficient to prevent recovery: the

courts have recognised that the true beneficiary of a liability policy is the third

party victim, and have, with notable exceptions, allowed the assured to

recover despite the criminal nature of his conduct.” (emphasis added) [45] As stated in Fedgen v Leyds supra and other authorities quoted,

exclusion clauses must be restrictively interpreted. In Impact

Funding Solutions Ltd v AIG Europe Insurance Ltd [2017] Lloyd’s

Rep IR 60 (SC), the English Supreme Court found that exclusion

clauses do not necessarily have to be narrowly construed; that

they must be given a proper meaning. A narrow meaning will

often be given in the event of ambiguity or if the context suggests

this. Lord Hodge who was part of the majority stated the following

at p 63: “An exclusion clause must be read in the context of the contract of

insurance as a whole. It must be construed in a manner which is consistent

with and not repugnant to the purpose of the insurance contract. There may

be circumstances in which in order to achieve that end, the court may

construe the exclusions in an insurance contract narrowly.”

[46] Mr Watt-Pringle relied on the New Zealand Court of Appeal

judgment in Trustees Executors Ltd v QBE Insurance

(International) Ltd [2010] NZCA 608 delivered on 14 December

27

2010, (“QBE”) which he had come across the night before the oral

arguments were submitted to me. The exclusion clause in that

judgment was also the bone of contention. That court, after

having found that it did not have sufficient evidence to evaluate

the different contentions of the parties, stated at paragraph [46] of

the judgment that the interpretation of the particular policy should

take place at a full trial, but then continued to make preliminary

comments in the hope that the parties might come to a

settlement. The court made it clear that its comments “are not

intended to bind any court in any subsequent proceedings.”

[47] At paragraph [51] in QBE the court consided, with reference to the

clause “depreciation (or failure to appreciate) in value of any investments”,

that “depreciation” did not mean loss in value from whatsoever cause

and proceeded: “It cannot have been the mutual intention of the parties to

exclude all coverage for Trustees Executors’ investment business.”

[48] The court continued at paragraph [53] in QBE as follows: “Our

inclination would thus be to categorise the Exclusion clause as excluding what

can be broadly described as losses arising from investment forces. The

Exclusion clause therefore would not apply, for example, to issues relating to

the negligent documentation of mortgages. We recognise that other situations

may not be so clear-cut. There may be an issue as to the construction of the

words “contributed to” in the Exclusion clause. It may be that these words

should not be interpreted in a manner which would rob the cover under the

Policy of meaning. Thus, there may be an issue as to whether every

investment movement or failure of any investment to appreciate, however

slight, should engage the exclusion, even where the occasion for the claim is

clearly negligence.” At paragraph [58] the court continued: “The

question might be whether the loss in value of the Fund was caused by

28

negligence or by investment forces or both. It may be that the relevant

mortgages, because of breaches of the investment guidelines, were from

inception, of lesser value and thus any loss totally related to negligence. The

comments we make at [53] are relevant if any loss is a combination of

negligence and investment forces.”(emphasis added)

[49] In QBE the exclusion clause did not contain a similar proviso as in

casu.

VII EVALUATION OF THE AUTHORITIES, COUNSEL’S

SUBMISSIONS AND THE EVIDENCE: The case against defendant

[50] When I evaluate the role played by defendant in advising plaintiff

how to invest her funds I shall keep in mind the words of Schutz

JA in Durr supra quoted at paragraph [1] of this judgment. I

hasten to say that the insurer did not try to show that defendant

was not liable to plaintiff. The insurer had a single strategy; a

one-pronged line of attack: to show that the consequences of

defendant’s action and/or advice fell squarely within the

parameters of the exclusion clause. I shall deal with this issue in

detail infra.

[51] The evidence presented by and on behalf of plaintiff is largely

undisputed, especially in respect of the first issue, i.e. whether a

case has been made out to hold defendant liable.

29

[52] Plaintiff was vulnerable in July 2010 when defendant advised her.

She was a widow with a two and a half year old boy. Her

husband passed away in tragic circumstances some four months

earlier. She experienced financial and emotional difficulties. She

had no experience of financial products and/or the financial

market. She received the proceeds of an insurance policy and

wanted to make a safe investment as the money was earmarked

for her son’s upbringing. Defendant was her deceased husband’s

broker and she trusted him fully to advise her in respect of the

investment of the sum of R2m.

[53] During the meeting with defendant when several forms –

Annexures ”A” to “E” to the particulars of claim - relating to the

investment were filled out for signature, plaintiff emphasised that

she could not afford to lose two cents. Defendant suggested the

Sharemax investment and said it was an investment “in property”

and “property cannot disappear”. This was Sharemax’ slogan all

along when the articles of financial journalists referred to supra

are considered. Defendant made it clear that he did not even

want to suggest any other investments as the proposed

investment was “baie veilig – extremely safe”. He referred

plaintiff to a bad copy of a newspaper article containing negative

comments about Sharemax investments, but informed her that

she had nothing to be concerned of as “hulle is jaloers - they are

jealous.” Plaintiff accepted defendant’s assurance immediately

without even reading the article. In this regard it is to be noted

that according to the pleadings defendant admitted informing

plaintiff that she did not have to be concerned as he had spoken

to Sharemax as well as his consultant. This was not good

30

enough. Defendant should have spoken to independent auditors,

attorneys or financial analysts. He should have insisted on

financial statements, such as income and expenditure accounts,

cash flow analyses and a balance sheet. He should have

inspected the shopping complex. If he did that, he would know

that the investment could not possibly have an income stream at

that stage or even in the foreseeable future.

[54] The investment that defendant induced plaintiff to make was a

property syndication investment. The Sharemax investment was

known as The Villa. The company used as the investment

vehicle was registered in 2010 only. This should have been a

serious concern as well. The Villa shopping complex was in the

process of being built. Ex facie the photographs handed in as

Exhibit B, the buildings were still incomplete when the

photographs were taken nearly six years later in January 2016.

Mr Heystek explained the potential dangers of property

syndication and also made the point that insofar as the

companies involved were unlisted, there was a lack of disclosure

making it difficult for financial analysts to make meaningful

comparisons. Accordingly, as testified to by him, a FSP “should not

advise an investment in something which he is not himself able to fully

understand.”

[55] Mr Heystek mentioned that defendant clearly did not explain the

risks and pitfalls of property syndication to plaintiff. According to

his experience properties are often sold at high valuations to the

companies that form the vehicle for property syndications,

allowing the promotors to make huge profits upfront. High

31

marketing costs and commissions are paid, whilst the income

stream from the underlying assets might be unpredictable and

uncertain.

[56] In casu several financial journalists and others warned investors

over a prolonged period. Defendant, having been aware of the

criticism, should have either himself investigated the reliability of

the investment or made enquiries from independent and reliable

sources. It is amazing that defendant could think for one moment

that interest could lawfully accrue from the investment from the

first month. I wonder where he thought the magical origin of the

income stream would derive from. No doubt, a simple

investigation or even an inspection of the half-built shopping

complex would have been an eye-opener. He should have

realised that enormous costs would have to be incurred to

complete the project. In fact, it was explained by Mr De Klerk in

Finweek of 8 July 2010 supra what was received and what was

still needed to complete the project. Another R2.25 was required

from the public before any income could be earned lawfully. The

half-built shopping complex could not earn any income for some

time – it was obviously dependent on being completed, the

signing of lease agreements and eventual and actual occupation

by tenants – but the investment provided for income to be paid to

investors from the start. This is apparently what defendant

believed would happen. In fact the first (and only) payment of

R1 400.00 was made to plaintiff in August 2010. No doubt,

defendant failed to present the true facts to plaintiff to afford her

an opportunity to make an informed decision.

32

[57] I agree with Mr Heystek’s testimony that all initial payments – at

least until income is eventually received from tenants - would

have to be paid out of funds put in by investors themselves.

Investors therefore paid their or other investors’ interest. There

were no other sources of income during the construction phase of

The Villa. The underlying property – the half-built shopping

complex could not produce income on a monthly basis as

investors and plaintiff in particular expected. Defendant was in

breach of his fiduciary duty towards plaintiff in that he did not take

reasonable steps to satisfy himself of the safety of the Sharemax

investment. I am also in agreement with Mr Heystek, accepting

the ruling in 2013 of the Ombud for Financial Services, Ms Bam,

that The Villa “bear uncanny characteristics to a so-called Ponzi Scheme.”

[58] If the totality of the evidence is considered, defendant should have

seen the red flashing lights, but not only that, he needed to heed

and advise plaintiff differently. Defendant offered wrong and

unsuitable advice to plaintiff, either through incompetence and/or

ingenuousness and/or negligence, or for the lure of a small

fortune. It is common cause that he earned a commission of

R120 000.00 for an afternoon’s effort. This is an enormous

amount of money and not market-related. It is a well-known

phenomenon that promotors in these types of schemes make use

of high commissions to attract brokers and so-called financial

advisors to do business. In the process pensioners, widows and

other vulnerable people’s savings and inheritances are being

collected, often to be lost when the house of cards collapses.

Defendant should have known that a return on an investment in

The Villa was a pie in the sky. His inexplicable, but obviously

33

poor advice is indicative of lack of skill, care and diligence and did

not commensurate with the commission received. The parallels

between the facts in casu and those in Durr are remarkable.

Defendant failed to make enquiries himself as did the broker in

Durr, but notwithstanding this he assured plaintiff that the

investment was “entirely safe,” as did the broker in Durr. Schutz

JA said on p 455 I-J of Durr that just about everything that the

broker told Durr was wrong, not that he knew it, but because he

had allowed himself to be misled by a series of deceits.

Defendant did not say much to plaintiff, but what he said was

false.

[59] Defendant acted contrary to the provisions of s 16 of the FAIS Act

and the Codes of Conduct published since then in accordance

with the provisions of s 15 and what the law expects of FSP’s

when he provided the financial advice that led to the R2 m

investment. A defence was raised in the pleadings, but defendant

elected not to testify in support of the pleaded defence. Although

plaintiff’s evidence is not contradicted, it does not mean that it

should necessarily be accepted. However, I am satisfied that, if

considered with the documents – Annexures “A” –“E” of the

particulars of claim, particularly the handwritten parts, and Mr

Heystek’s version, defendant did not act as could have been

expected of a reasonable FSP. Mr Watt-Pringle did not contend

differently and I have reason to believe that he accepted that

plaintiff’s case against defendant had been proven on a balance

of probabilities.

34

[60] Much more may be said of the defendant’s actions and/or

inactions, but I conclude by finding that defendant was negligent,

and even dishonest, when he advised plaintiff, by placing no

credence on the negative articles in the press and failing to

objectively investigate the criticism. He failed to exercise the

degree of skill, care and diligence which one is entitled to expect

from a FSP. The facts in casu are very similar to that in Durr

supra and the result should be the same.

The third party action

[61] Mr Watt-Pringle submitted that the insurer was perfectly entitled to

limit the ambit of its liability and that it has done so in clear and

unambiguous language. The insurer chose what risks it was

prepared to accept. The policy and the exception make perfect

sense. He also agreed that a “businesslike” interpretation is to be

preferred, but submitted that the resort to restrictive interpretation

only arises if the exclusion sought to be relied upon is ambiguous.

[62] Mr Watt-Pringle extracted facts during cross-examining from both

plaintiff and Mr Heystek in order to try and persuade the court that

the defendant’s claim for indemnification against the insurer falls

within the parameters of the exclusion clause and that it should

therefore be dismissed. As submitted, he did this to

contextualise certain factual issues.

35

[63] Mr Watt-Pringle submitted that the exclusion clause is triggered by

two provisions, firstly, that the plaintiff’s claim against defendant

arises from or “is contributed to by depreciation (or failure to appreciate) in

value” of the investment undertaken by defendant on her behalf or

pursuant to his advice; and secondly, the investment was

undertaken by defendant on plaintiff’s behalf or pursuant to his

advice “as a result of [an] actual or alleged representation, guarantee or

warranty provided by or on behalf of the insured as to the performance of” the investment.

[64] Mr Watt-Pringle submitted that, regarding the first scenario,

plaintiff’s shares became worthless. According to him her claim “does not have to arise from, but need only be ‘contributed to’ by the

depreciation or failure to appreciate in value of an investment”. Therefore

the application of the exclusion was triggered. Secondly, plaintiff

testified that the investment in The Villa had been made on the

strength of defendant’s representations as to the performance of

the investment. She indicated that she could not afford to lose

two cents of her capital. Therefore, Mr Watt-Pringle submitted

that plaintiff relied on a representation which is in line with a

representation, guarantee or warranty provided by defendant as

the insured as to the performance of the investment, thus

triggering the provision of the exclusion clause. The fact that this

was not pleaded is immaterial according to him. The court must

consider the facts testified to. Mr Watt-Pringle also argued that,

absent such averment, defendant would be able to rely on the

written documents signed by plaintiff when the investment was

made, indicating the uncertain nature of the investment and the

heightened risk occasioned by the expectation of above inflation

36

returns. The argument continued as follows: “The common element

in both triggering provisions is that, broadly speaking, the underwriter is not

prepared to underwrite either the performance of an investment or the

veracity of any representation, guarantee or warranty as to the performance

of the investment, which results in a claim against the financial intermediary.”

[65] Mr Watt-Pringle heavily relied upon the QBE judgment of the New

Zealand Court of Appeal quoted quite extensive supra. He

submitted that it is of considerable persuasive value in the context

of this case. He submitted that it represents the only definitive

judicial pronouncement where an exclusion clause worded in

similar language was considered by a court in circumstances

where a claim was made on a financial advisor by an investor

who suffered a loss as a result of an investment having been

rendered worthless. In QBE the court dismissed the appeal, but

made it clear that its findings were preliminary. It reiterated that

its preliminary comments were not intended to bind any court in

any subsequent proceedings.

[66] Mr Watt-Pringle submitted that the proviso to the exception

explains when only indemnity should be granted. The loss must

be solely as a result of the negligence of the insured (or his/her

employee) in failing to effect a specific investment transaction in

accordance with the specific prior instructions of the insured’s

client. The effect hereof, according to him, is obvious. If I may

give an example based on his submission: the client instructed

the FSP to buy shares in Capitec Bank in say 2008, but the FSP

negligently, for example because of finger-trouble, pressed the

37

wrong button on his computer and bought shares in African Bank

instead, and it turned out eight years later that Capitec’s shares

quadrupled, but African Bank’s shares became worthless, then

the insurer shall be liable to indemnify the FSP.

[67] Unlike as Mr Mullins contended, to which I shall turn infra, Mr

Watt-Pringle submitted, based on evidence extracted from Mr

Heystek, that the policy at hand is a standard policy providing for

all sorts of cover to a wide range of FSP’s. Therefore cover

against claims based on investment advice is but one of a

number of insured events.

[68] Mr Watt-Pringle accused Mr Mullins for not trying to interpret the

exclusion clause. The clause is not repugnant to the purpose of

the insurance contract if the judgment In QBE is considered. It is

also not “unbusinesslike”. According to him we are confronted with

a depreciation in the value of an investment. If plaintiff continued

to receive income, the parties would not have been at court.

[69] Mr Mullins, as could be expected, differed completely from Mr

Watt-Pringle. He made the point that the insurer who relies on

the exclusion must prove that the exclusion applies. He

submitted that the cross-examination of plaintiff and Mr Heystek

was unsuccessful in that the attempt to show that a

representation was made or a guarantee was provided by

defendant failed. This is not the case of the plaintiff in the

pleadings. Plaintiff never claimed on the strength of a

representation, guarantee or warranty, but in any event, the

written terms of the agreement between them preclude such

38

claim. According to Mr Mullins, plaintiff’s claim is not one arising

from or contributed to by depreciation or a failure to appreciate in

value of the Sharemax investment. He also submitted that to

suggest that would be to stretch the words “arising from or

contributed to by depreciation” far beyond their intended meaning, in a

way that would rob the cover of all meaning. He emphasised that

“plaintiff’s claim on the pleadings and in evidence is that defendant owed her

proper advice, that what she required was a relatively safe and low-risk

investment, and that the Sharemax investment was anything but that. Her

claim is not for an investment return of inflation plus 2% or something of that

nature. Nor could she ever have lawfully claimed that, given the terms of

Annexures ”A” to “D” of the particulars of claim.”

[70] Mr Mullins was taken by surprise as he was unaware of the QBE

judgment until provided with a copy thereof by his opponents, but

he tried his best to distinguish it from the facts in casu during his

oral submissions. He also pointed to the dicta at paragraphs [51]

and [53] as well as [44] and [45].

[71] Mr Mullins indicated that Mr Watt-Pringle studiously avoided the

handwritten statements on Annexure “D” of the particulars of

claim. This document outlined plaintiff’s requirements as

mentioned supra. These handwritten notes bolster plaintiff’s

evidence to the effect that she could not lose any of the capital.

As required by the authorities supra (inter alia Mahmood

Investments) contractual provisions must be read in context,

having regard to relevant circumstances known to the parties at

the time of entering into the contract.

[72] I considered Mr Watt-Pringle’s submissions carefully, but am of

the view that he placed too much emphasis on the wording of the

39

exclusion clause and in doing so, disregarded the purpose of the

insurance contract entered into between defendant and the

insurer. The heading of the policy is instructive. It reads:

“Professional Indemnity Insurance for Members of the Financial

Intermediaries Association.” Seven insured events are tabulated,

which may appear at first blush to bolster Mr Watt-Pringle’s

argument that to disallow defendant indemnity would not be

repugnant to the purpose of the insurance contract. I have a

different view. I shall explain infra. I refer to Colinvaux’s Law of

Insurance, supra and wish to emphasise that the main purpose of

an indemnity policy is to permit the insured to recover for

negligence. As the author states, an indemnity policy presumes

that there will have been some misconduct on the insured’s part.

[73] Brokers and financial advisors are now regulated by legislation as

is the case with, for example, attorneys. Professional Indemnity

Insurance for FSP’s is now a reality. Insurers are comforted in

that they know that FSP’s who apply for indemnity insurance are

professional people who have to pass stiff examinations before

they may become registered as FSP’s in terms of the FAIS Act.

Also, insurers do not have to provide indefinite cover and may

limit their potential liability as happened here. The other insured

events in the particular policy, except the first, to wit Professional

Indemnity, apply to any employer who wants to insure against

such events. It is not uncommon in the market place for a shop

owner to take out insurance in respect of employee dishonesty,

computer crime, defamation and like issues. However, the shop

owner will not take out professional indemnity insurance. FSP’s

on the other hand, most definitely need cover insofar as they

40

often have to give advice that may later be found to have been

given negligently. The chances of being sued for huge amounts

for wrong and/or negligent advice by far exceed financial losses

pertaining to the other insured events. It is thus not a valid

argument to submit that defendant will not be robbed of cover if

the exclusion clause is interpreted in the way contended for by

the insurer.

[74] The insurer has undertaken to indemnify defendant against losses

arising out of any legal liability arising from claims first made

against the defendant and reported during the period of insurance

for breach of duty in connection with his business by reason of

any negligent act, error, or omission, committed in the conduct of

the defendant’s business. I refer to the first paragraph under

Insured Events on page 2 of the policy. The insurer admitted this

in its plea. This issue must be the starting point of any

considerations in respect of the exclusion clause, although I

accept that the policy must be considered as a whole together

with the circumstances attendant upon its coming into existence.

As said by Lewis JA in Novartis supra: “A court must examine all the

facts – the context – in order to determine what the parties intended. And it

must do that whether or not the words of the contract are ambiguous or lack

clarity. Words without context mean nothing.” The context is

undoubtedly clear: defendant needed indemnity to safe-guard him

against losses in the event of a breach of duty by reason of any

negligent act, error or omission. He received such cover as is

apparent from the clause referred to supra. However, in the

exclusion clause not a word is said about negligence, error or

omission, save insofar as the proviso stipulates that the insured

41

will be covered if a specific investment instruction of a client is not

carried out due to the insured’s negligence. It is highly unlikely

that such an event may occur, but in any case, it cannot be

argued that the insurer should not be held liable for the insured’s

negligence, error or omission on the strength of this proviso.

[75] In my view the exclusion clause must be interpreted restrictively

so that it makes business sense, i.e. in the eyes of both insurer

and insured. It cannot be applicable where the insured advised a

client to invest in a scheme that was a hopeless “investment” from

the onset, contrary to legislation and probably a fraudulent and

unlawful Ponzi scheme. The purpose of the first leg of the

exclusion is to prevent an insured from claiming indemnification if

his client has filed a claim because his/her investment had not

grown by, for example 20% over a three year period as expected,

but only by 15%, or remained static, or worse, depreciated by 5 or

10%. We all know that financial markets are volatile, that several

unforeseen market forces may affect investments and therefore, it

would be “businesslike” for the insurer to exclude indemnification

in such events. Surely, it cannot be expected of a prudent insurer

to become embroiled in litigation between the client and the

insured FSP in such instances. The same applies to the second

leg. An eager FSP should not be heard to admit that he/she has

represented or guaranteed to an investor that a particular

investment will increase by 100% in a year’s time. The insurer

will be fully entitled to rely on the exclusion clause and refuse to

indemnify the insured if the representation later appears to be off

the mark. Again, this is not what occurred in casu.

42

[76] I find the example provided by Mr Watt- Pringle pertaining to the

negligent buying of wrong shares contrary to the client’s

instructions as if that is the only way in which a FSP will have

indemnity cover to be repugnant to the purpose of the insurance

contract. The FSP must be entitled to indemnification, bearing in

mind that the ultimate beneficiary is the client who got wrong

advice as in casu. Defendant breached all principles upon which

a skilled and honest FSP is supposed to conduct himself. It is not

a case of depreciation of an investment as the “investment” was

worthless from beginning to end. The R2m “invested” was not

enough to pay the interest of the thousands of “investors” that

became involved in the scheme prior to plaintiff. Obviously, not

enough “investors” joined the scheme after plaintiff for her to

receive any “income’ after August 2010. The plaintiff’s claim is

also not based on a failure to appreciate. Plaintiff does not rely

on any representation, guarantee or warranty as to the

performance of the investment, notwithstanding Mr Watt-Pringle’s

valiant effort to extract facts during cross-examination. This was

not the case that defendant had to meet or what the insurer had

to deal with in the third party action.

VIII CONCLUSION: [77] In conclusion I find that plaintiff has made out a proper case

against defendant in respect of the merits of her claim. The

quantum has been settled, save for the simple calculation to be

made in respect of the expected return on capital which Mr

Mullins has calculated and which is not in dispute. There shall

43

therefore be judgment in favour of plaintiff in respect of the capital

of the claim and interest as requested.

[78] Mr Mullins requested an order in terms whereof the plaintiff’s

costs be paid jointly and severally by defendant and the third

party. Obviously, defendant is liable for plaintiff’s party and party

costs, but the situation in respect of the third party and plaintiff is

different, there being no lis between them. Mr Mullins warned at

the start of proceedings that he intended to do so as he believed

that the insurer should have consented to defendant admitting

liability. In doing so, he would have closed his case and the

effects of the exclusion clause could have been argued without

reference to oral evidence. Mr Watt-Pringle’s client was not

prepared to adhere to this request and it became apparent why.

The insurer elected to extract evidence during cross-examination,

thereby hoping to show that defendant’s claim for indemnification

falls within the parameters of the exclusion clause. I am of the

view that the insurer cannot be blamed for the stance taken,

especially considering that counsel could not find any relevant

South African authority on a similar exclusion clause and the

insurer’s counsel eventually had to rely on New Zealand authority.

[79] I also find that defendant is entitled to be indemnified by the

insurer, subject to the limit of R2.5m and deduction of the excess

of R10 000.00, and an appropriate order shall be made. The

insurer shall pay the costs of the defendant, he being the

successful party in the third party action, such costs to include the

costs of the joinder application which were reserved.

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IX ORDERS: [80] Therefore the following orders are made:

1. Defendant is ordered to pay to plaintiff the capital amount of

R2 000 000.00 and interest calculated to 27 July 2016 in the

amount of R718 600.00.

2. Defendant shall pay mora interest on the amount of

R2 718 000.00 to plaintiff at the rate of 10.5% per annum,

calculated from 28 July 2016 to date of payment thereof, both

dates included.

3. The third party shall indemnify defendant against defendant’s

liability to plaintiff, subject to the limit of R2 490 000.00, in respect

of defendant’s capital and costs together with interest thereon at

the rate of 10.5% per annum from date of judgment to date of

payment.

4. Defendant is ordered to pay plaintiff’s taxed or agreed party and

party costs, such costs to include the following:

4.1 the costs of Senior Counsel;

4.2 the reasonable qualifying, preparation, reservation and

travelling and accommodation costs of Mr M Heystek, including

costs of and associated with his rule 36(9)(b) summary;

4.3 plaintiff’s travelling costs to and from Bloemfontein and her

accommodation costs in Bloemfontein in order to testify.

5. The third party is ordered to pay defendant’s costs in respect of

the third party action as well as the costs relating to the

application to join the third party.

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_____________ JP DAFFUE, J

On behalf of plaintiff: Adv JF Mullins SC Instructed by: Honey Attorneys Bloemfontein

On behalf of defendant: Adv PJJ Zietsman Instructed by: Blair Attorneys Bloemfontein

On behalf of 3rd party: Adv CE Watt-Pringle SC and Adv C Bester Instructed by: Andre Muller & Associates c/o McIntyre & Van der Post Bloemfontein